Earlier generations of benefactors thought that social service should be like sainthood or socialism. But this one thinks it should be like venture capital.

These thoroughly modern do-gooders dress like venture capitalists. They talk like them. They even think like them. That means that aside from the occasional passion for heirloom vegetables, they are not particularly crunchy. They don’t wear ponytails, tattoos or Birkenstocks. They don’t devote any energy to countercultural personal style, unless you consider excessive niceness a subversive fashion statement.

Next to them, Barack Obama looks like Abbie Hoffman.

It also means that they are not that interested in working for big, sluggish bureaucracies. They are not hostile to the alphabet-soup agencies that grew out of the New Deal and the Great Society; they just aren’t inspired by them.

He’s talking about something that resonates with me pretty closely:

The older do-gooders had a certain policy model: government identifies a problem. Really smart people design a program. A cabinet department in a big building administers it.

But the new do-gooders have absorbed the disappointments of the past decades. They have a much more decentralized worldview. They don’t believe government on its own can be innovative. A thousand different private groups have to try new things. Then we measure to see what works.

I’ve worked extensively with social entrepreneurs and social investment funds in the UK, so it’s nice to see the same idea gaining some traction in the US. Or, at least, it’s nice to see the media start to take notice.

As for the idea that, at some point, “a large government agency in a big building takes over”, most social entrepreneurs I know are instinctively opposed to government involvement. They like the idea of access to public funding but appreciate that government departments and programs are often concerned more with political outcomes than with social delivery. These people are not naive, they understand that such involvement is likely to dilute or damage their mission.

Conversely, this means that scaling-up these initiatives – successfully taking a local project to the national level – is fraught with difficulties. Local successes are not likely to be repeatable on a wider scale or in another setting.

The right approach, in my view, and one that’s been half-heartedly attempted in the UK, is to provide training and support to potential social entrepreneurs in the form of mentoring and access to local investment funds before setting them loose.

The problem this approach encounters is that pretty much everyone agrees that social entrepreneurs are born and not made. You can end up backing a lot of wrong horses with little to show for it.

“The older do-gooders had a certain policy model: government identifies a problem. Really smart people design a program. A cabinet department in a big building administers it.”

Let me suggest an alternate design strategy.

“Compassionate people identify a need. That person ministers to that need using thier own resources. The person is close enough to the needy person to think of them as a person and treat them as such, and they administer all the funds and resources.”

For really big problems:

“Compassionate people identify a need. People that care minister to that need. When thier own resources are insufficient to meet that need, they turn to discerning wealthy individuals who have asked compassionate people to approach them (or be referred to them) with needs so that thier wealth might be made useful to the community by its specific application. A person close enough to the needy person to think of them as a person and treat them as such administers the portion of funds and resources allocated to that need.”

And for really big problems:

“Compassionate people identify a need. People that care minister to that need. When thier own resources are insufficient to meet that need, they turn to discerning wealthy individuals who have asked people like this to approach them with needs so that thier wealth might be made useful to the community. These persons then realize that the need is great enough that the most concerned, dedicated, and willing person involved in this problem should be endowed with sufficient funds to do this full time. A person close enough to the needy person to think of them as a person and treat them as such administers the portion of funds and resources allocated to that need.”

Any problem bigger than that isn’t solved with a more complex solution. Instead, the solution is distributed, with each individual community having its own independent organization. Occassionally, the leaders of these organizations meet to exchange ideas.

The above solution is in fact fantastically complex. Not only can the solution not be created through central planning, but it can’t even be analyzed in a central fashion. A diagram of the solution and everyone involved would be incomprehensible. You can’t answer basic questions about the solution such as ‘Is anyone not being helped?’, or ‘Are funds being allocated fairly?’ or most anything else. Hense, such a solution is an anathema to anyone that wants to see, understand, or control ‘the big picture’. It’s certainly not easy to write about vague solutions like this and sound like anything but an idiot. No academic papers come out of this approach.

But almost any wicked problem that is solved is solved using precisely this approach. All real wicked problems are solved using distributed bottom up approaches with managers that posess only partial information about the problem and mostly are relying on the effort and judgment of thier underlings.

It’s a feature (but then I suspect you knew that already). It’s when people start treating it as a bug that problems arise.

Social initiatives of this kind depend, like many enterprises, on the energy and commitment of the people involved. But in social enterprises this is absolutely crucial – successful social entrepreneurs are “close to the problem, involved with the solution and responsible for delivery”. Trying to analyse how a successful project works, systemizing that solution, calling it “best practice” and attempting to implement it elsewhere changes a social process into a management problem.

When that happens, systems and procedures predominate over delivery and you end up building an organization rather than solving a problem.

A few comments from the point of view of a practicing venture capitalist, since social entrepreneurship is often compared to venture. They are both alike and unalike. First the important difference:

– The classic venture model puts some tough constraints on the type of business funded. Without going into the whys, the company has to have fast growth potential, and should be salable sometime between 3 and 7 years after investment, with potential for a 10x or better increase in capital value (an ‘exit’ for the venture capitalist).

– Successful social venture operations seem to have a different operating principle: Create an entity that is self sustaining, without continuing outside subsidy, governmental or otherwise. ‘Exit’ is not a big issue. Continuing operation is a good in itself, and any mergers are judged on value in pursuing the goal, rather than to return capital. (There’s some danger that I’m over-generalizing here. This is mostly based on talking to the folks at Benetech, whose office happens to be one floor above mine.)

Trying to mix these goals in one investment firm, or one venture, is pretty tough. If have a hybrid investor that insists that the candidates have to be ‘venture model’ AND fit the social goal AND have a great team AND so forth, you may not find many deals to do. You can try to have both models under one roof in separate teams, like Omidyar Network, but then you’re always having to explain to co-investors or target ventures which model is in play at any particular time.

The problem of cohabitation within one venture is that pure financial investors tend to look askance at co-investors whose ultimate goals differ. This isn’t a slam against social venture, it actually applies to any others, e.g., corporate strategic investors, whose investing goals differ or are not clear. Differences like this cause ongoing issues in deciding strategy at the board level, and are exacerbated when the ‘exit’ approaches. I’ve been there (albeit with corporates) and it’s not pretty.

Ways in which venture and social entrepreneurship are the same:

– The team is the biggest single contributor to ultimate success.

– The venture must define a very specific need and build a product or service to address it. No bet hedging, but pay very close attention to market feedback, and be ready to ‘dance’ if the market tells you that your first idea was wrong. Taking this type of focused approach, as opposed to a common non-profit tack of addressing whatever needs make the founders feel good, is probably the biggest contribution that comes from veterans of the classic venture model.

– Be world-class and scalable. Even if you start off addressing a local need, be sure that the offer can hold up to competition when it escapes its first niche.

One specific comment about the linked NYT article is that the ‘America Forward’ gang sounds like a yet another pork barrel attempt to get hands on tax money. Government controlled funds are perennial losers in venture. No matter the disclaimers, political influence plays a role in picking the portfolio, which tends to feature ‘local champions’ that get slaughtered when they face best in breed competition. It’s straightforward public choice theory: The feedback cycle in venture is 5-10 years in length. That’s well beyond the accountability threshold of politicians, who on to making their next mess before the bad news comes in. (This is one of the reasons that smart governmental money managers, like pension fund controllers, get the money beyond the politicians’ reach by placing it with professional investors.)

With social venture, the desired outcome is more ambiguous, and the payout time is potentially indefinite. Ergo, the accountability is even more vague,and the chance of politically motivated interference is raised even higher. So one of further benefits of Bill Gates and other private investors play in social entrepreneurship is simply that they aren’t the government, they are using their own money and paying attention to outcomes.

As a vote for the “feature” column, it may help to think of both approaches as having a naturally occurring limit:

–The government agency approach has a limit on how effective its solutions can be, dictated by political and legal realities as well as the innate inefficiency involved with government run programs of this nature. Given the inevitable bureaucratic nature of such agencies/programs, there is also a limit on its flexibility to deal with a changing environment or with the law of unintended consequences.

–The decentralized approach has a limit on its scope, usually in the form of the funds and sweat capital its founders can provide. Depending on the type of solution involved, there may also be a secondary limit on how many people will actually utilize its services.

(As an example of a solution limit, I’ll pick on one of my favorite targets, the newly created industry of carbon credit sellers. They sell credits to companies looking to put the fashionable “carbon neutral” line in their advertisements, and do so in a market-driven manner. This may be a viable solution for the chosen problem space; however, by definition of the marketplace, there exists some limit to the consumers’ demand for such a product.)

Unbeliever #8
“as well as the _innate_ inefficiency involved with government run programs of this nature.”

I suggest that the ‘corporate mentality of the shareholders’ (read electorate) determines the political and legal realities, as well as expectations, and ultimately the management practices put in place with government run programs. We tolerate cost ineffectiveness in government programs and that is what we get. Even two modifications to traditional government programs would result in dramatic changes to efficiency. The first would be zero based budgeting, rather than the automatic incremental annual budget process that prevails, and the second would be to simply implement standard management practices, including such basics as the authority to hire and fire.

Ian: That is indeed one part of what I was referring to (in gross shorthand) by using the term “innate inefficiency”. Rather than try to cram half a course in organizational theory into a blog comment–the content of which many posters here already know–I’ll just say that when referring to efficiency, there are two kinds: operational efficiency and market efficiency, and you’ve inadvertently overestimated the impact one stakeholder has on the terms.

Adam Smith noted that government has 5 primary functions (Book 5 of “Wealth of Nations”:http://www.adamsmith.org/smith/won/won-index.html), which it is more _market_ efficient for a central government to provide rather than rely on individual market transactions. These functions are national defence, the justice system, public works/infrastructure, education, and “the dignity of the sovereign”. Although these functions might be carried out via an inefficent procedure, which would be a case of _operational_ inefficiency, it would still be more efficient for society as a whole to have the government take up the job.

Politics inherently cause inefficiency, whether it is interpersonal politics which cause friction, or inter-office politics which delay projects, or political correctness which places artificial barriers in some industry. And this is the problem with comparing government institutions with private enterprise: the two are not wholly analogous. Citizens are not shareholders, because while shareholders are interested in both operational and market efficiency in everything the business does, a heterogenous pool of citizens is a primary source of politics.

Thus my assertion that, while we should always strive to improve them, government entities which operate outside the 5 areas listed above will always include a structural element of inefficiency in the _market_ sense. The fact that they also include a structural element of _operational_ inefficiency is a result of the organizational type, i.e. bureaucracy, and are not necessarily a result of the constituents themselves.

(Yeesh, that’s a lot of additional explanation for a measly two words!)

To tie this all back to the original topic… any of the liberal aims AL has in mind which are served by a government entity will necessarily encounter some form of inefficiency, perhaps (usually?) enough so to fail its goals. That doesn’t automatically preclude government undertakings of this sort, but as I noted it should be recognized as an unavoidable _feature_ whenever that path is chosen.

I’d also like to add that as a self-avowed conservative, I have for some time admired Bill Gates as the model of turn-of-the-century “sewer liberalism” the world desperately needs more of, rather than the modern version of liberalism (read as post-60’s) that has infected one half of the political aisle. It may surprise my politically affliated friends, but my biggest hope is not for a newly revitalized Reagan-esque movement to emerge on the right; it is for Gates and his type to become the face of the left today.

“I’d also like to add that as a self-avowed conservative, I have for some time admired Bill Gates as the model of turn-of-the-century “sewer liberalism” the world desperately needs more of…”

Agreed. He’s the Andrew Carnagie of his day.

“It may surprise my politically affliated friends, but my biggest hope is not for a newly revitalized Reagan-esque movement to emerge on the right; it is for Gates and his type to become the face of the left today.”

Yes, but the sad truth of the matter is that Bill Gates is one of the single most hated figures by the Left these days, despite the fact that he’s done more to end human suffering than any few ten’s of thousands of them.

I agree with Tim that “the ‘America Forward’ gang sounds like a yet another pork barrel attempt to get hands on tax money.” Outside of that sentence, what on earth does a decentralized, mildly anti-government attempt to remedy social ills have to do with modern liberalism?

Unbeliever #10
_”Politics inherently cause inefficiency…”_ While reserving the right to challenge some other aspects of your explanation of _market_ versus _operational_ efficiency… can you define ‘Politics’ for me. Its another one of those words we use too often with qualification. Thanks.

Ian: I was using it the pejorative sense, as in “all the personal angst that individuals bring into group decision making”. Whenever there is power to be used or gained and multiple people have input to the process, some sort of plot, power grab, end-run around the rules, silo building, grandstanding, power base building, personality conflict, revenge plot, or favor-trading will occur. Call it a known bug with human nature.

I’m hoping to get out of this thread without having to define efficiency, but the general idea is that these distractions cause inefficient outcomes. Meetings take longer, vanity projects of little overall value are initiated, information is hoarded, resources are allocated based on personal influence instead of market outcomes, etc.

Thanks -Andrew- Unbeliever. But… as defined, I don’t see ‘politics’ as an exclusive property of government agencies. And as far as bureacratic inefficiency goes, many former collegues of mine (having migrated from the government to the private sector) commented on even worse excesses.

Very true, inefficiency is not exclusive to government by any means; government agencies are simply one of the institutions in which it is _unavoidable_ , which was the point of my usage of the word “innate” in my comment “#8″:http://www.windsofchange.net/archives/010137.php#c8

For me, the best thing about these sorts of projects versus government programs is the ability for them to fail if they don’t work. Government programs rarely self-correct without extreme difficulty, and almost never die even if they’re completely useless. At best, even if someone wants to actually address the problem, they start a new program, so you get multiple programs that have basically the same mission.

At the end of the day, the problem is that representative democracy is not well-incented to be good at “management”, especially if things are highly centralized. Elected officials’ time horizons are too short, they get far more voter visibility and benefit from cool new programs as opposed to fixing – much less replacing or eliminating – old ones, and there’s simply so many programs that they can’t all be watched closely.

Foobarista #19
I agree with your list of shortcomings for government programs, but not with the implied conclusion ‘that’s the way it is and can’t be changed. The problem as I see it is a failure of the electorate to recognise that it really is _their_ government, and an attitude of benign neglect is a formula for the sort of bureaucratic ineptitude you describe. The onus is on the electorate not to tolerate short term thinking in the officials they elect, to insist on decentralized delivery models as appropriate, and to never fund a program that can’t be monitored. Would this require structural changes in how government programs are developed and managed… absolutely, but the prerequisite change is in the mindset of the electorate.

The problem with “blame the people” arguments is that there’s no way an electorate can sensibly evaluate most parts of the bureaucracy. The media rarely understands it and only covers it with one-off anecdotes about its good works, or, very infrequently, stories about its screw-ups.

Also, since you get to pick one politician or another, you may find one that has a good idea for improving the DMV, for example, but that you otherwise oppose (maybe you’re pro-life and they support abortion, etc). And the more the government does, the more its functions get buried in a mountain of bureaucracy, and the more undemocratic it will get.

I’m becoming more convinced that our current forms of electoral democracy simply don’t scale beyond a certain size, and we’ve passed that size.

Foobarista #21
The media, as for-profit institutions, will cover whatever the public demands. Don’t be afraid to delegate day to day management to properly chosen representatives, and by emphasizing the ‘follower’ rather than the ‘leader’ roles in our elected _representatives_, we can better approximate the democratic model. I worry that you are proposing throwing the baby out with the bathwater.

OMG – this sounds like me! I didn’t know there were that many of us out there. It’s been frustrating for me to find so many people on the similar mental level to be considered by some to be birckenstock wearing hippies. I think this is a good thing that may get more corporate types to defect a little.